Skip to main content
Discussion Paper

Vector Autoregression and Causality: A Theoretical Overview and Simulation Study

This paper provides a theoretical overview of Wald tests for Granger causality in levels vector autoregressions (VAR’s) and Johansen-type error correction models (ECM’s). for VAR models the results for inference are not encouraging. The limit theory typically involves nonstandard distributions and nuisance parameters, and there is no sound statistical basis for testing causality in such a framework. Granger causality tests in ECM’s also suffer from nuisance parameter dependencies asymptotically and nonstandard limit theory.